Did Pensions Get Clobbered in 2011?

William Selway of Bloomberg reports, U.S. State, Local Pensions Drop 8.5%:

U.S. public pension-fund assets fell in the third quarter by the most since 2008 as stocks sank amid concern that Europe’s debt crisis would curb economic growth, Census Bureau data showed.

Assets of the 100 largest public-worker plans decreased $237 billion, or 8.5 percent, from the prior quarter to $2.53 trillion by Sept. 30, the bureau said today in a report. It marks the first decline since the second quarter of 2010 and the biggest since the last three months of 2008, when holdings slid 13 percent during Wall Street’s credit crisis.

The setback may strain state and local governments that have set aside more money to cover retirement benefits. That’s pressured governments already coping with diminished tax collections and has propelled efforts to reduce benefit costs.

The asset decline was driven by losses in stock holdings, which slipped $134.7 billion to $769.6 billion, the Census Bureau said. The value of holdings of corporate bonds, U.S. treasuries, and international securities also fell.

The third-quarter (SPC) rout pushed the pensions’ assets back to where they were during the last three months of 2010, wiping out gains this year.

Markets Swinging

Pension funds typically count on earnings of about 8 percent a year to pay for promised benefits, which means they need more money to pour into their funds or to generate returns that will compensate for years when money is lost.

Fund overseers use accounting techniques to spread gains and losses over time. That prevents required contributions from swinging with changes in financial markets, though losses elevate required contributions over time.

U.S. stock markets have recovered some of the losses suffered during the third quarter as European authorities moved to ease strains on banks and countries in the euro currency zone. The Standard & Poor’s 500 Index has gained 11 percent since the end of September, recovering most of the 14 percent loss from the prior three months.

100 largest public pension plans see first asset declines in 5 quarters:

Total assets of the 100 largest public defined benefit retirement systems declined 8.5% in the third quarter, their first overall quarterly loss in more than a year, according to the Census Bureau.

he top 100 plans had total assets of $2.5 trillion as of Sept. 30, a 1.1% increase over the same quarter in 2010, but investment returns were negative for the first time since the second quarter 2010, with $198.6 billion in losses recorded in the third quarter.

The 100 largest public plans surveyed by the Census Bureau represent 90% of total public plan assets. This year, the summary included 81 state plans and 19 local plans, Erika Becker-Medina, chief of the Census Bureau's employment and benefits statistics branch, said in a telephone interview.

The overall decrease in assets over the previous quarter was largely because of investment losses, with a 14.9% drop in corporate stocks and a 14.2% drop in international securities. Corporate bonds decreased 8.6% and federal government securities decreased 2.4% in the same period.

According to census data, the 100 largest plans have 30.4% of their holdings in corporate stocks, followed by 17.7% in international securities, 15.7% in corporate bonds, 7% in federal securities, 4.1% in cash and short-term investments, 0.4% in mortgages, and 0.1% in local government securities, with the remainder in other securities and alternative investments, including private equity and mutual funds.

“While this is just a snapshot in time, volatility like this is something that pension funds have to worry about,” Kil Huh, research director for Pew Center on the States, said in a telephone interview.

Assets of major public pension funds fell 8.5% in third quarter:

The stock market's summer slide took a toll on public pension funds, with the assets of the 100 largest ones down 8.5% in the third quarter, according to the Census Bureau.

The quarterly decline was the first since early last year and the steepest since the fourth quarter of 2008, when the asset total plummeted 13.5% at the height of the global financial crisis, the bureau said Wednesday.

The latest drop brought the value of investments and cash held by the biggest pension funds — including the California Public Employees' Retirement System, the California State Teachers' Retirement System and the Los Angeles City Employees' Retirement System — to $2.5 trillion at the end of September, down $236.6 billion from the end of June.

Driving the decline was a 14.9% slide in the funds' corporate stock holdings, which at last count represented 30.4% of the funds' assets.

The pension fund numbers reflect the performance of financial markets in the third quarter, when stock prices worldwide tumbled from the intensified European debt crisis.

The Dow Jones industrial average dropped 12% in the three-month period. But stocks have rebounded since the end of September, and pension fund holdings probably have bounced back as well.

Indeed, stocks and corporate bonds have rebounded and pension fund holdings have bounced back. Also, keep in mind that pensions invest in government bonds as well as private markets like real estate and private equity where market values are less volatile.

But not all investments fared well against the major indexes. In particular, it was a tough year for hedge funds, many of which are still on the ropes. The long and short of Long/Short funds and most hedge funds is that they sell beta as alpha. Period. This is why I've been urging pension funds to rethink their hedge fund strategy and consider following the real smart money and seeding some emerging managers in liquid strategies that offer true alpha.

Importantly, all pensions should allocate a minimum of 2% into emerging hedge fund manager platform using a solid managed account platform which provides them with transparency/liquidity and risk controls. Seeding hedge funds isn't as risky as people think, especially if it's done properly.

More worrisome, pensions that are piling into hedge funds, getting raked on fees, still do not understand what they are getting in terms of returns. They blindly accept some monthly NAV as if it's gospel! This last point was underscored by a contact of mine at Phocion Investments, an investment performance consulting firm that services the investment management industry:

"...We got some leads and spoke to a few offices, but what we are realizing is that this industry is clueless and is very slow in accepting change and being accountable. Even the offices who invest with external manager accept what the managers given them without any scrutiny. We found major risk in pension funds that invest in alternative assets, they are very comfortable in reveiving a monthly NAV without asking any questions on what's included in the NAV, who prepared it and so on..."

Most pension funds are absolutely stupid and clueless when it comes to investing in hedge funds. All too often, they are intimidated by charismatic managers who use "sophisticated" lingo to try to impress or intimidate unsuspecting pension fund managers.

I'll never forget my due diligence experience with some of these charlatans. It took me less than 15 minutes to figure out Norshield was a Ponzi scheme. Johnny "X" (John Xanthoudakis) walked into the boardroom sporting a tan, wearing a fancy Italian suit, smiling with his bleached white teeth, flaunting his "incredible risk-adjusted returns," a perfect 45 degree line. When I told him they are "too good to be true," he asked me if there was anything he could do to "facilitate an investment" (code for "how much to bribe you?"). That meeting was over fast. Amazingly, municipal pension plans in Quebec invested hundreds of millions in this joke of an outfit (too many of them are on the take; you better believe it is time to take action on municipal pensions).

I also dealt with my share of arrogant assholes in the hedge fund industry. Guys like "von Muffins" (our pet name for him) who was threatening us that if we do not invest with him, we will "never have access to his fund". Or another condescending jerk who was talking down to me telling me "Soros taught me risk management, you guys don't get it" to which I replied "is that why Soros fired you?" (don't ever get cute with me in a meeting, I'll rip your balls off and shove them down your throat!).

Anyways, back to 2011. It was an extremely tough year because of the macro environment and endless political dithering in Europe. Volatility minced returns and this might be a harbinger of things to come as machine readable news take over markets. Pensions and other institutions will need to adjust to this changing landscape.

Below, I leave you with a clip of NYSE COO Larry Leibowitz discussing new ways to police an automated market (ie. maintain the status quo). I also embed a clip of the best and worst CEOs of 2011 (h/t, Jack Dean). No question about it, John Corzine was definitely the worst, but along with Jeff Bezos, I would have put Steve Jobs as one of the best. In the pension fund industry, I know who I would nominate as the best CEO for 2011 and the last decade. Will close out the year tomorrow.